QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
June 30, 2010

OR

o

TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the
transition period
from to

Commission
File Number: 001-32240

NEENAH PAPER, INC.

(Exact name of registrant as
specified in its charter)

Delaware

20-1308307

(State or other
jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

3460
Preston Ridge Road
Alpharetta, Georgia

30005

(Address of principal
executive offices)

(Zip Code)

(678)
566-6500

(Registrants telephone
number, including area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES o
NO o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting
company o

(Do not check if a smaller
reporting company)

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x

As of July 30, 2010, there were
approximately 14,760,000 shares of the Companys common stock outstanding.

Neenah Paper, Inc. (Neenah or
the Company), is a Delaware corporation incorporated in April 2004. The
Company has two primary operations: its fine paper business and its technical
products business.

The fine paper business is a leading
producer of premium writing, text, cover and specialty papers used in corporate
identity packages, corporate annual reports, invitations, personal stationery
and high-end packaging for point of sale advertising. The technical products
business is a leading international producer of transportation and other filter
media, durable, saturated and coated substrates for a variety of end uses and nonwoven
wall coverings.

In March 2010, the Companys
wholly owned subsidiary, Neenah Paper Company of Canada (Neenah Canada) sold
approximately 475,000 acres of woodland assets in Nova Scotia (the Woodlands)
to Northern Timber Nova Scotia Corporation, an affiliate of Northern Pulp Nova
Scotia Corporation (collectively, Northern Pulp), for C$82.5 million ($78.6
million). The sale resulted in a pre-tax gain, net of fees and other
transaction costs, of $74.1 million. The sale of the Woodlands resulted in the
substantially complete liquidation of the Companys investment in Neenah
Canada. In accordance with Accounting Standards Codification (ASC)
Topic 830, Foreign Currency Matters
(ASC Topic 830), $87.9 million of cumulative currency translation adjustments
attributable to the Companys Canadian subsidiaries have been reclassified into
earnings and recognized as part of the gain on sale of the Woodlands. The
transaction did not generate a cash tax liability because the tax basis for the
Woodlands was approximately equal to the sale price. See Note 5, Discontinued
Operations.

For the three and six months ended June 30,
2010, the results of operations, the gain on sale of the Woodlands ($74.1
million) and the reclassification into earnings of cumulative currency
translation adjustments attributable to the Companys Canadian subsidiaries
($87.9 million) are reported as discontinued operations in the condensed
consolidated statements of operations. The results of operations of
the Woodlands are reported as discontinued operations for the three and six
months ended June 30, 2009.
See Note 5, Discontinued Operations.

Basis of Consolidation and Presentation

These statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC) and, in accordance with those rules and
regulations, do not include all information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Management believes that the disclosures made are adequate for a fair
presentation of the Companys results of operations, financial position and
cash flows. In the opinion of management, the condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of operations, financial
position and cash flows for the interim periods presented herein. The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make extensive use of estimates and assumptions
that affect the reported amounts and disclosures. Actual results may vary
from these estimates.

These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys most recent Annual
Report on Form 10-K. The results of operations for any interim
period are not necessarily indicative of the results of operations to be
expected for the full year.

The condensed consolidated financial
statements of Neenah and its subsidiaries included herein are unaudited, except
for the December 31, 2009 condensed consolidated balance sheet, which was
derived from audited financial statements. The condensed consolidated
financial statements include the financial statements of the Company and its
wholly owned and majority owned subsidiaries. All significant intercompany
balances and transactions have been eliminated from the consolidated financial
statements.

The Company computes basic earnings
(loss) per share (EPS) in accordance with ASC Topic 260, Earnings Per Share (ASC Topic 260). In accordance with ASC Topic 260, share-based
awards with non-forfeitable dividends are classified as participating
securities. In calculating basic earnings per share, this method requires net
income to be reduced by the amount of dividends declared in the current period
for each participating security and by the contractual amount of dividends or
other participation payments that are paid or accumulated for the current
period. Undistributed earnings for the period are allocated to participating
securities based on the contractual participation rights of the security to
share in those current earnings assuming all earnings for the period are distributed.
Holders of restricted stock, restricted stock units (RSUs) and target
performance unit awards (Performance Units) have contractual participation
rights that are equivalent to those of common stockholders. Therefore, the
Company allocates undistributed earnings to restricted stock, RSUs and common
stockholders based on their respective average ownership percentages for the
period.

ASC Topic 260 also requires
companies with participating securities to calculate diluted earnings per share
using the Two-Class method. The Two-Class method requires the denominator
to include the weighted average participating securities along with the
additional share equivalents from the assumed conversion of stock options
calculated using the Treasury Stock method, subject to the anti-dilution
provisions of ASC Topic 260.

Diluted EPS was calculated to give
effect to all potentially dilutive common shares using the Treasury Stock
method. Outstanding stock options, stock appreciation rights (SARS), restricted
stock units (RSUs) and target performance unit awards (Performance Units)
represent the only potentially dilutive security effects on the Companys
weighted-average shares. For the three and six months ended June 30,
2010 approximately 1,510,000 and 1,565,000 potentially dilutive stock-based
compensation awards, respectively, were excluded from the computation of
dilutive common shares because the exercise price of such awards exceeded the
average market price of the Companys common stock for the period the awards
were outstanding. For the three and six months ended June 30, 2009
approximately 1,620,000 and 1,790,000 such
potentially dilutive stock-based compensation awards, respectively, were
excluded from the computation of dilutive common shares. In addition, as
a result of the loss from continuing operations for the three and six months
ended June 30, 2009, approximately 70,000 and 60,000 incremental shares,
respectively, resulting from the assumed vesting of potentially dilutive
securities were excluded from the diluted earnings per share calculation, as
the effect would have been anti-dilutive.

Income
(loss) from continuing operations available to common stockholders

6.3

(8.6

)

13.5

(9.3

)

Income
(loss) from discontinued operations, net of income taxes



(0.1

)

134.6



Less:
Undistributed amounts allocated to participating securities (a)





0.5



Net
income (loss) available to common stockholders

$

6.3

$

(8.7

)

$

147.6

$

(9.3

)

Weighted-average
basic shares outstanding

14,735

14,652

14,715

14,651

Add:
Assumed incremental shares under stock compensation plans

792



652



Weighted-average
diluted shares

15,527

14,652

15,367

14,651

Earnings (Loss) Per Common Share

Basic

Continuing
operations

$

0.43

$

(0.58

)

$

0.92

$

(0.63

)

Discontinued
operations



(0.01

)

9.11



$

0.43

$

(0.59

)

$

10.03

$

(0.63

)

Diluted

Continuing
operations

$

0.41

$

(0.58

)

$

0.88

$

(0.63

)

Discontinued
operations



(0.01

)

8.73



$

0.41

$

(0.59

)

$

9.61

$

(0.63

)

(a) In accordance with ASC Topic
260, for the three and six months ended June 30, 2009 undistributed losses
have been entirely allocated to common stockholders because the holders of
participating securities are not contractually obligated to share in the losses
of the Company.

Note 2.
Accounting Standard Changes

As of June 30, 2010, no
amendments to the ASC had been issued that will have or are reasonably likely
to have a material effect on the Companys financial position, results of
operations or cash flows.

Note 3. Comprehensive Income (Loss)

Comprehensive income (loss)
includes, in addition to net income (loss), gains and losses recorded directly into
stockholders equity on the condensed consolidated balance sheet. These gains
and losses are referred to as other comprehensive income items. Accumulated
other comprehensive income (loss) consists of foreign currency translation
gains and (losses) and adjustments related to pensions and other postretirement
benefits. The Company does not provide income taxes for foreign currency
translation adjustments related to indefinite investments in foreign
subsidiaries. The sale of the Woodlands resulted in the substantially
complete liquidation of the Companys investment in Neenah Canada. In
accordance with ASC Topic 830, for the six months ended June 30, 2010,
$87.9 million of cumulative currency translation adjustments attributable to
the Companys Canadian subsidiaries have been reclassified into earnings and
recognized as part of the gain on sale of the Woodlands. There were no tax
consequences related to the repatriation of funds from the sale of the
Woodlands. As of June 30, 2010 and December 31, 2009, accumulated
other comprehensive income (loss) was $(27.3) million and $91.5 million,
respectively.

The
following table presents the components of comprehensive income (loss):

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Net
income (loss)

$

6.3

$

(8.7

)

$

148.2

$

(9.3

)

Other
comprehensive income (loss):

Unrealized
foreign currency translation gain (loss)

(17.3

)

11.0

(29.9

)

0.5

Reclassification
of cumulative translation adjustments related to investments in Canada





(87.9

)



Adjustments
to pension and other post-employment benefit liabilities

(1.3

)

0.9

(1.0

)

1.3

Total
other comprehensive income (loss)

(18.6

)

11.9

(118.8

)

1.8

Comprehensive
income (loss)

$

(12.3

)

$

3.2

$

29.4

$

(7.5

)

Note 4.
Closure of the Ripon Mill

In May 2009, the Company
permanently closed its fine paper mill located in Ripon, California (the Ripon
Mill). For the three and six months ended June 30, 2009, the
closure resulted in a pre-tax charge of $18.0 million. The charge was
comprised of approximately $6.7 million in non-cash charges primarily for losses
related to the carrying value of property, plant and equipment, a curtailment
loss of $0.8 million related to postretirement benefit plans in which employees
of the Ripon Mill participated and cash payments for contract terminations and
severance and other employee costs of approximately $10.5 million.

As of June 30, 2010, the
remaining long-lived assets of the Ripon Mill, primarily composed of land and
buildings, are classified as Assets held for sale on the condensed consolidated
balance sheet. The Company
believes that the sale of such assets will be completed within 12 months. Assets held for sale are valued at the lower of cost or fair
value less cost to sell. The assets of the Ripon Mill are reported at
their aggregate historical cost of $6.2 million.

The
Company accounted for costs associated with the closure of the Ripon Mill in
accordance with ASC Topic 420, Exit or
Disposal Cost Obligations.
The Company expects the payments of all costs related to the closure of
the Ripon Mill to be substantially complete by December 31, 2010. The
following table presents the status of such closure costs as of June 30,
2010:

In March 2010, Neenah Canada
sold the Woodlands to Northern Pulp, for C$82.5 million ($78.6
million). The sale resulted in a pre-tax gain, net of fees and other
transaction costs, of $74.1 million. The sale of the Woodlands resulted in the
substantially complete liquidation of the Companys investment in Neenah
Canada. In accordance with ASC Topic 830, $87.9 million of cumulative
currency translation adjustments attributable to the Companys Canadian
subsidiaries have been reclassified into earnings and recognized as part of the
gain on sale of the Woodlands. The sale of the Woodlands represented the
cessation of the Companys operating activities in Canada; however, the Company
will have certain continuing post-employment benefit obligations related to its
Canadian operations. The transaction did not generate a cash tax liability
because the tax basis for the Woodlands was approximately equal to the sale
price.

Net proceeds from the sale were used
to repay in full $40 million of outstanding term loan borrowings (the Term
Loan) and repay approximately $26 million in outstanding revolving loans which
reduced the balance of such outstanding loans under the Companys bank credit
agreement (the Bank Credit Agreement) to zero. In addition, the Company made
approximately $3.1 million in contract termination payments related to the
closure of the Ripon Mill that became due and payable upon the sale of the
Woodlands.

In June 2008, Neenah Canada
sold the Pictou Mill to Northern Pulp. Pursuant to the terms of the
transaction, Northern Pulp assumed all of the assets and liabilities associated
with the Pictou Mill, as well as existing customer contracts, supply
agreements, labor agreements and pension obligations.

In conjunction with the sale of the
Pictou Mill, the Company entered into a stumpage agreement (the Stumpage Agreement)
which allowed Northern Pulp to harvest softwood timber annually from the
Woodlands. The Stumpage Agreement was terminated in March 2010 in
conjunction with the sale of the Woodlands. For the six months ended June 30,
2010, the Company recognized revenue of approximately $1.4 million, related to
timber sales pursuant to the Stumpage Agreement. For the three and
six months ended June 30, 2009, the Company recognized revenue of
approximately $0.5 million and $1.3 million, respectively, related to the Stumpage Agreement.

The
results of operations of the Woodlands and the gain on sale of the Woodlands
are reported as discontinued operations in the condensed consolidated
statements of operations for each period presented. The following table
summarizes the results of discontinued operations:

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Net
sales (a)

$



$

0.5

$

1.4

$

1.3

Discontinued
operations:

Income
(loss) from operations before income taxes

$

(0.3

)

$

0.6

$

1.1

$

0.8

Gain
on disposal of the Woodlands





74.1



Loss
on disposal of the Pictou Mill



(0.3

)



(0.3

)

Reclassification
of cumulative translation adjustments related to investments in Canada

Neenah
Germany revolving line of credit (variable rates) due November 2010

8.0

12.9

Other
debt (2.9% fixed rate)

0.1

0.9

Total
debt

243.0

319.2

Less:
Debt payable within one year

9.5

55.6

Long-term
debt

$

233.5

$

263.6

Senior Unsecured Notes

In November 2004, the
Company completed an underwritten offering of ten-year senior unsecured notes
(the Senior Notes) at an aggregate face amount of $225 million. The
Senior Notes bear interest at a rate of 7.375 percent, payable May 15 and
November 15 of each year and mature on November 15, 2014. The
Senior Notes are fully and unconditionally guaranteed by all of the Companys
subsidiaries, with the exception of Neenah Germany.

In November, 2009, the Company
amended and restated its Bank Credit Agreement. As amended, the Bank
Credit Agreement consisted of a $100 million senior, secured revolving credit
facility (the Revolver) and (ii) a $40 million senior secured Term
Loan. The Bank Credit Agreement terminates on November 30, 2013. In
March 2010, the Company used proceeds from the sale of the Woodlands to
repay approximately $26 million in outstanding Revolver borrowings which
reduced the balance of such outstanding loans under the Bank Credit Agreement
to zero. During the three months ended June 30, 2010, the Company used
approximately $9.5 million of restricted proceeds from the sale of the
Woodlands as permitted by the Bank Credit Agreement. For the six months
ended June 30, 2010, the Company recognized within interest expense approximately
$0.3 million of costs to write-off deferred financing costs associated with the
Term Loan.

As of June 30, 2010, the
Company had no outstanding Revolver borrowings. Borrowing availability
under the Revolver varies over time depending on the value of the Companys
inventory, receivables and various capital assets. As of June 30, 2010, borrowing
availability under the Revolver included $9.1 million for the collateral value
of the Ripon Mill. Borrowing availability under the Revolver is reduced by outstanding
letters of credit and certain other items. As of June 30, 2010, the
Company had approximately $1.8 million of letters of credit and other items
outstanding which reduced availability and $92.8 million of borrowing
availability under the Revolver. As of
December 31, 2009, the Company had $27.9 million in outstanding Revolver
borrowings at a weighted-average interest rate of 4.6 percent per annum.

In March 2010, the Company used
proceeds from the sale of the Woodlands to extinguish the Term Loan by repaying
in full $40 million of outstanding Term Loan borrowings. As of
December 31, 2009, the Company had $40.0 million in outstanding Term Loan
borrowings at a weighted-average interest rate of 4.5 percent per annum.

The Bank Credit Agreement contains
events of default customary for financings of this type, including failure to
pay principal or interest, materially false representations or warranties,
failure to observe covenants and other terms of the Bank Credit Agreement,
cross-defaults to certain other indebtedness, bankruptcy, insolvency, various
ERISA violations, the incurrence of material judgments and changes in control.

The Bank Credit Agreement contains
covenants with which the Company must comply during the term of the
agreement. Among other things, such covenants restrict the Companys
ability to incur certain additional debt, make specified restricted payments,
including dividends, and capital expenditures, authorize or issue capital
stock, enter into transactions with affiliates, consolidate or merge with or
acquire another business, sell certain of its assets, or dissolve or wind
up. In addition, the terms of the Bank Credit Agreement require the
Company to achieve and maintain compliance with a fixed charge coverage ratio
if availability under the Bank Credit Agreement is less than $20 million.
At June 30, 2010, the Company was in compliance with all covenants.

Other
Debt

In December 2006, our
wholly-owned subsidiary, Neenah Gessner GmbH (Neenah Germany) entered into a 10-year agreement with
HypoVereinsbank and IKB Deutsche Industriebank AG to provide 10.0 million of
project financing for the construction of a saturator (the German Loan
Agreement). As of June 30, 2010, 8.1 million ($9.9 million, based on
exchange rates at June 30, 2010) was outstanding under the German Loan
Agreement.

Neenah Germany has a revolving line
of credit (the German Line of Credit) with HypoVereinsbank that provides for
borrowings of up to 15 million for general corporate purposes. The German Line
of Credit is secured by the domestic accounts receivable of Neenah Germany. As
of June 30, 2010 and December 31, 2009, the weighted-average interest
rate on outstanding German Line of Credit borrowings was 4.0 percent per annum
and 4.1 percent per annum, respectively. As of June 30, 2010, 6.6
million ($8.0 million, based on exchange rates at June 30, 2010) was
outstanding under the German Line of Credit and 8.4 million ($10.3 million,
based on exchange rates at June 30, 2010) of credit was available.
In November 2009, Neenah Germany extended the termination date for the
German Line of Credit to November 30, 2010.

Neenah Germanys ability to pay
dividends or transfer funds to the Company is limited under the terms of the
German Line of Credit, to not exceed certain limits defined in the
agreement without lender approval or repayment of the amount outstanding under
the line, which was 6.6 million ($8.0 million, based on exchange rates at June 30,
2010) at June 30, 2010. In addition, the terms of the German Line of
Credit require Neenah Germany to maintain a ratio of stockholders equity to
total assets equal to or greater than 45 percent. Neenah Germany was in
compliance with all provisions of the German Line of Credit as of June 30,
2010.

Substantially all active employees
of the Companys U.S. paper operations participate in defined benefit pension
plans and/or defined contribution retirement plans. Neenah Germany has defined
benefit plans designed to provide a monthly pension upon retirement for
substantially all its employees in Germany. In addition, the Company
maintains a non-qualified supplemental defined benefit pension plan (the SERP).
The Company provides benefits under the SERP to the extent necessary to fulfill
the intent of its defined benefit retirement plans without regard to the
limitations set by the Internal Revenue Code on qualified defined benefit
plans.

In April 2010, the Company executed
a reduction in force (RIF) plan at the Appleton, Wisconsin mill. The RIF resulted in the elimination of
expected years of future service for certain mill employees eligible to
participate in the Companys defined benefit pension plans and postretirement
medical plan. In accordance with ASC Topic 715,Compensation  Retirement Benefits (ASC Topic 715), the
Company measured the assets and liabilities of the affected postretirement
plans as of April 30, 2010 and recognized a curtailment loss of
approximately $35 thousand for the three and six months ended June 30,
2010.

The
closure of the Ripon Mill (See Note 4, Closure of the Ripon Mill) resulted in
the elimination of expected years of future service for mill employees eligible
to participate in the Companys defined benefit pension plans and
postretirement medical plan. In accordance with ASC Topic 715, the
Company measured the assets and liabilities of the affected postretirement
plans as of May 31, 2009 and recognized an aggregate curtailment loss of approximately
$0.8 million for the three and six months ended June 30, 2009.

The following table presents the
components of net periodic benefit cost:

Components of Net Periodic Benefit Cost

Pension Benefits

Postretirement Benefits
Other than Pensions

Three Months Ended June 30,

2010

2009

2010

2009

Service
cost

$

1.0

$

1.1

$

0.4

$

0.4

Interest
cost

3.5

3.6

0.5

0.6

Expected
return on plan assets (a)

(3.4

)

(2.9

)





Recognized
net actuarial loss

0.3

0.4



0.1

Amortization
of prior service cost

0.1

0.1

0.1

0.1

Amount
of curtailment loss recognized



0.2



0.6

Net
periodic benefit cost related to continuing operations

$

1.5

$

2.5

$

1.0

$

1.8

Pension Benefits

Postretirement Benefits
Other than Pensions

Six Months Ended June 30,

2010

2009

2010

2009

Service
cost

$

2.1

$

2.3

$

0.8

$

0.9

Interest
cost

7.0

7.1

1.1

1.2

Expected
return on plan assets (a)

(6.8

)

(5.7

)





Recognized
net actuarial loss

0.6

0.8



0.1

Amortization
of prior service cost

0.1

0.1

0.2

0.2

Amount
of curtailment loss recognized



0.2



0.6

Net
periodic benefit cost

$

3.0

$

4.8

$

2.1

$

3.0

(a)The expected return on plan assets is determined by
multiplying the fair value of plan assets at the prior year-end (adjusted for
estimated current year cash benefit payments and contributions) by the expected
long-term rate of return.

The Company expects to make
aggregate contributions to qualified and non-qualified defined benefit pension
trusts and pay benefits for unfunded defined benefit pension plans of
approximately $17 million (based on exchange rates at June 30, 2010) in
calendar 2010. For the six months June 30, 2010, the Company made
approximately $7.9 million of such contributions/payments.

Note 9. Stock Compensation Plan

The Company reserved 3,500,000
shares of $0.01 par value common stock (Common Stock) for issuance under the
2004 Omnibus Stock and Incentive Plan (the Omnibus Plan). As of June 30,
2010, approximately 1,790,000 shares of Common Stock were reserved for future
issuance under the Omnibus Plan. As of June 30, 2010, the number of shares
available for future issuance was not reduced by outstanding SARs because the
closing market price for the Companys common stock was less than the exercise
price of all outstanding SARs. The Company accounts for stock-based
compensation pursuant to the provisions of ASC Topic 718, CompensationStock Compensation (ASC
Topic 718).

Valuation and Expense Information

Substantially
all stock-based compensation expense is recorded in selling, general and
administrative expenses on the condensed consolidated statements of
operations. The following table summarizes stock-based compensation
expense and related income tax benefits.

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Stock-based
compensation expense

$

1.3

$

0.8

$

2.5

$

1.8

Income
tax benefit

(0.5

)

(0.4

)

(1.0

)

(0.7

)

Stock-based
compensation, net of income tax benefit

$

0.8

$

0.4

$

1.5

$

1.1

The following table summarizes total
compensation costs related to the Companys equity awards and amounts
recognized in the six months ended June 30, 2010.

Stock Options

Restricted Stock

Unrecognized
compensation cost  December 31, 2009

$

1.4

$

1.4

Add:
Grant date fair value current year grants (a)

1.1

4.4

Less:
Compensation expense recognized

0.9

1.6

Unrecognized
compensation cost  June 30, 2010

$

1.6

$

4.2

Expected
amortization period (in years)

2.0

2.2

(a)The fair value of current year stock option and
restricted stock awards includes $0.1 million and $0.2 million, respectively,
related to a change in the Companys estimate of forfeitures for awards granted
in prior years.

Stock
Options

For
the six months ended June 30, 2010, the Company awarded nonqualified stock
options to Long-Term Incentive Plan (the LTIP) participants to purchase
approximately 201,550 shares of common stock (subject to forfeiture due to
termination of employment and other conditions). In addition, the Company
awarded to non-employee members of the board of directors nonqualified stock
options to purchase 5,640 shares of Common Stock. For the six months
ended June 30, 2010, the weighted-average exercise price of such
nonqualified stock option awards was $13.68 per share. The weighted-average
grant date fair value for stock options granted during the six months ended
June 30, 2010 was $5.72 per share and was estimated using the
Black-Scholes option valuation model with the following assumptions:

For the three and six months ended
June 30, 2010, the aggregate pre-tax intrinsic value of stock options
exercised was approximately $0.4 million. No stock options were exercised
during the three and six months ended June 30, 2009. The aggregate
intrinsic value of approximately 1,490,000 stock options that were exercisable
at June 30, 2010 was $1.4 million. The aggregate intrinsic value of
approximately 1,365,000 stock options that were exercisable at
December 31, 2009 was $0.1 million.

As of June 30, 2010, the
aggregate intrinsic value of 2,380,000 stock options and SARs that were vested
or expected to vest was $7.7 million. The weighted-average grant date
fair value of such stock options was $8.22 per share. As of December 31,
2009, the weighted-average grant date fair value and aggregate intrinsic value
of 2,250,000 stock options that were vested or expected to vest was $8.41 per
share and $4.1 million, respectively.

The aggregate grant date fair value
of approximately 200,000 stock options and SARs that vested during the six
months ended June 30, 2010, was $0.9 million. As of June 30, 2010,
certain participants met age and service requirements that allowed their stock
options to qualify for accelerated vesting upon retirement. As of June 30,
2010, LTIP participants held options to purchase 280,000 shares of common stock
that would have been exercisable if they had retired as of such date. The
aggregate grant date fair value of options subject to accelerated vesting was
$1.1 million. Stock options subject to accelerated vesting for expense
recognition become exercisable according to the contract terms of the
stock-based awards.

As of June 30, 2010, the
Company has approximately 865,000 unvested stock options with a
weighted-average grant date fair value of $4.22 per share. As of
December 31, 2009, approximately 905,000 unvested stock options were
outstanding with a weighted-average grant date fair value of $3.85 per share.

Performance
Units

During the six months ended June 30,
2010, the Company granted target awards of 183,500 Performance Units to LTIP
participants. The measurement period for the Performance Units is
January 1, 2010 through December 31, 2010. Common Stock equal to
between 40 percent and 200 percent of the Performance Unit target will be
awarded based on the Companys return on invested capital, revenue growth for
the Technical Products segment, the level of cash flow for the Fine Paper
segment and total return to shareholders relative to a peer group of companies
and the Russell 2000® Value small cap index. The weighted-average grant date
fair value for the Performance Units was $25.36 per share. Compensation cost is
recognized pro rata over the vesting period.

Note 10. Goodwill and Other Intangible Assets

The following table presents changes
in the carrying amount of goodwill for the six months ended June 30,
2010. All such goodwill is reported in the Technical Products segment.

The
following table presents the gross carrying amount of intangible assets and the
related accumulated amortization for intangible assets subject to amortization.

June 30, 2010

December 31, 2009

Gross
Amount

Accumulated
Amortization

Gross
Amount

Accumulated
Amortization

Amortizable
intangible assets

Customer
based intangibles

$

13.3

$

(3.4

)

$

15.5

$

(3.4

)

Trade
names and trademarks

5.6

(1.8

)

6.6

(1.9

)

Acquired
technology

1.0

(0.4

)

1.2

(0.4

)

Total

19.9

(5.6

)

23.3

(5.7

)

Unamortizable
intangible assets:

Trade
names

8.8



9.9



Total

$

28.7

$

(5.6

)

$

33.2

$

(5.7

)

Note 11.
Contingencies and Legal Matters

Litigation

The Company is involved in certain
legal actions and claims arising in the ordinary course of business. While the
outcome of these legal actions and claims cannot be predicted with certainty,
it is the opinion of management that the outcome of any such claim which is
pending or threatened, either individually or on a combined basis, will not
have a material adverse effect on the consolidated financial condition, results
of operations or liquidity of the Company.

Employees
and Labor Relations

Hourly employees at the Whiting,
Neenah, Munising and Appleton paper mills are represented by the United
Steelworkers Union (the USW). The collective bargaining agreement for the
Appleton paper mill expired on May 31, 2010. The Company is currently
negotiating a new labor agreement for the mill with the USW. In May 2010,
the Company and the USW signed a new collective bargaining agreement for the Munising
paper mill that is effective through July 14, 2013. The collective
bargaining agreements for the Whiting and Neenah paper mills expire on January 31,
2013 and June 30, 2013, respectively. Separately, the Neenah, Whiting and
Munising paper mills have bargained jointly with the union on pension matters.
The agreement on pension matters will remain in effect through 2019.

Indemnifications

Pursuant to a Distribution
Agreement, an Employee Matters Agreement and a Tax Sharing Agreement, the
Company has agreed to indemnify Kimberly-Clark Corporation (Kimberly-Clark)
for certain liabilities or risks related to the spin-off of the Company from
Kimberly-Clark in November 2004.
Many of the potential indemnification liabilities under these agreements
are unknown, remote or highly contingent. Furthermore, even in the event that
an indemnification claim is asserted, liability for indemnification is subject
to determination under the terms of the applicable agreement. For these
reasons, the Company is unable to estimate the maximum potential amount of the
possible future liability under the indemnity provisions of these agreements.
However, the Company accrues for any potentially indemnifiable liability or risk
under these agreements for which it believes a future payment is probable and a
range of loss can be reasonably estimated. As of June 30, 2010, management
believes the Companys liability under such indemnification obligations was not
material to the condensed consolidated financial statements.

Note 12.
Business Segment Information

The Company reports its operations
in two segments: Fine Paper and Technical Products. The fine paper business is
a producer of premium writing, text, cover and specialty papers. The technical
products business is an international producer of filtration media, durable,
saturated and coated substrates for a variety of end uses; and nonwoven wall
coverings. Each segment employs different technologies and marketing strategies.
Disclosure of segment information is on the same basis that management uses
internally for evaluating segment performance and allocating resources.
Transactions between segments are executed at market prices and such
transactions are eliminated in consolidation. The costs of shared services, and
other administrative functions managed on a common basis, are allocated to the
segments based on usage, where possible, or other factors based on the nature
of the activity. General corporate expenses that do not directly support
the operations of the business segments are shown as Unallocated corporate
costs.

The following table summarizes the
net sales, operating income (loss) and total assets for each of the Companys
business segments.

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Net sales

Fine
Paper

$

68.9

$

61.3

$

138.5

$

126.1

Technical
Products

99.7

73.9

197.4

143.2

Consolidated

$

168.6

$

135.2

$

335.9

$

269.3

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Operating income (loss)

Fine
Paper

$

9.2

$

(10.0

)

$

18.7

$

(1.4

)

Technical
Products

8.5

3.3

17.8

2.7

Unallocated
corporate costs

(4.0

)

(3.8

)

(6.4

)

(6.9

)

Consolidated

$

13.7

$

(10.5

)

$

30.1

$

(5.6

)

June 30, 2010

December 31, 2009

Total Assets

Fine
Paper

$

162.5

$

166.3

Technical
Products

321.9

353.4

Assets
held for sale

6.2

10.0

Corporate
and other

94.1

107.8

Total

$

584.7

$

637.5

Note
13. Condensed Consolidating Financial Information

Neenah
Paper Company of Canada, Neenah Paper Michigan, Inc. and Neenah Paper
Sales, Inc. (the Guarantor Subsidiaries) guarantee the Companys Senior
Notes. The Guarantor Subsidiaries are 100 percent owned by the Company and all
guarantees are full and unconditional. The following condensed
consolidating financial information is presented in lieu of consolidated
financial statements for the Guarantor Subsidiaries as of June 30, 2010
and December 31, 2009 and for the three and six months ended June 30,
2010 and 2009. Certain deferred tax assets presented in the Guarantor
Subsidiaries column as of December 31, 2009 were presented in the Neenah
Paper, Inc. column as of June 30, 2010 as such assets will ultimately
be realized by Neenah Paper, Inc. due to the substantially complete
liquidation of Neenah Canada.